Tag Archives: spending

Lessons from Germany

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Spiegel Online International talks about a (relatively) strong German economic performance in the coming year, following on the heels of a strong performance for 2011.  It also draws a contrast, while outlining the jealousy of its European neighbors.

Germany’s economic success does not make the country more popular among its neighbors, though. After all, this is the same country that has been blocking all proposals to use the European Central Bank (ECB) to provide more generous financing for embattled euro-zone countries. Some European countries appear to be secretly hoping that Germany, Europe’s economic paragon, will also soon feel the brunt of the crisis.

How did the Germans achieve this?  One path is through the intermediate-term outcome of some economic and governmental reforms they put into place in 2003, in part to cure themselves of being the “sick man of Europe.”  They:

  • increased, from management’s perspective, the mobility of their labor force,
  • provided stronger financial incentives for the unemployed to go back to work, rather than paying them unemployment “benefits” for not working,
  • reduced taxes,
  • reduced government debt relative to their GDP.

One of the things the labor reforms led to was increased hiring because the reforms made it easier for employers to hire.  In 2011 alone, for instance, a half million new jobs were created in a population of 81.5 million.  Their reforms also encouraged more people to try to go back to work.  The resulting increased employment rate matched up with the lower tax burden to leave more money in the hands of individual Germans.  In short, Germany took steps to free up its economy, moving it closer to an open, free market, especially in comparison with their embattled euro-zone neighbors, and embarrassingly so relative to the US.

Their European neighbors, on the other hand, are not implementing similar reforms; indeed, although the embattled euro-zone nations are cutting spending, they’re actually raising the tax burden on their populations and businesses.  Moreover, they’re eschewing reforming their labor laws which leave unions with a decisive upper hand.

Are there lessons here for us?  Let’s see: those half million German jobs would work out to nearly 2 million new jobs in the US in 2011.  Germany cut taxes, but like the failing nations of Europe, our government insists on raising taxes.  Our tax increases aren’t even intended to close any budget gap, or to pay down any national debt, either—they’re for supporting even higher spending.  And here we are, just as are the embattled euro-zone nations, mired in a three-year-old recession in all but name—stagnating away with high unemployment, rapidly increasing budget deficits, and exploding national debt.

Hmm….

Anger in the EU

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But it’s misplaced, and perhaps driven by embarrassment.  Great Britain refused, a few days ago, to go along with a proposal to alter the fundamental European Union treaty to allow for the creation of a fiscal union, touted as a solution to the existing EU sovereign debt crisis.

The petulance of others of the EU leadership is illustrated with these examples:

Le Canard Enchaine (The Chained Duck) reports that French President Nicolas Sarkozy called Great Britain’s Prime Minister, David Cameron, a “stubborn child.”  Apparently, Sarkozy went on: Cameron had only one goal, that of “protecting the (London) City, which wants to continue to behave like a tax oasis.”  As if either of these—protecting his capital city, and maintaining a tax oasis (if that’s what he was doing)—were a bad thing.

And this: Guy Verhofstadt, the head of ALDE (Alliance for Liberals and Democrats for Europe), a liberal group in the European Parliament, spoke on the matter in his native Flemish Wednesday: he didn’t think English would be an “appropriate language.”

Others have insisted that Great Britain now must quit the EU.

But Cameron isn’t so alone (at least not yet) as his detractors insist.  Ireland has said that it must submit the matter to a national referendum.  Recall that the continent had a negative attitude toward the Greek government’s attempt to refer bailout terms to their people for consent or rejection.  Similarly, the Czech Republic and Sweden now insist on involving their respective parliaments in any decision to go along with a fiscal union.  Indeed, the Czech Republic has gone further, insisting that any union should apply only to members of the euro zone, and Hungary has joined them in this assessment.  Both the Czechs and the Hungarians also are on record as rejecting coordinating—”harmonizing”—national tax policies, a key parameter of a fiscal union.  Such a thing, they say, can “bring nothing positive, nothing good.”  The Czech Republic has gone yet further: they will discuss the matter, but they will take no decision for or against the union until they know the details of the pact—including those heretofore undefined “sanctions.”

Given that the proposed fiscal union cannot succeed and does not actually address the present crisis (it can only face the inevitable next one), and given that part of the demand for the treaty change involved demands for tax changes that would have hit Great Britain disproportionately, Prime Minister David Cameron was right to make the moves he did.

And given that the proposed fiscal union cannot succeed and does not actually address the present crisis, and these are becoming increasingly clear as other members of the EU share British concerns about the efficacy of the pact, the detractors are beginning to see the blunder they’ve committed with this “union.”  They’re expressing their embarrassment as anger and frustration—a sign, not of their obstinacy, but of their continued failure fully to realize their error.  That realization is only just beginning.

Do-Nothing…Congress?

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That’s the mantra of President Obama, Progressives generally, and the NLMSM.  But what’s actually going on?

In the Senate, we’ve had no budget offering, despite a legal requirement for one, for 900 days.  Indeed, the Senate has actively refused to propose a budget for those two and a half years.  We see legislation offering tax cuts blocked unless those cuts can be “paid for” with tax increases elsewhere.  We see active suppression of legislation encouraging pipeline infrastructure development which would produce tens of thousands of jobs promptly.  We see legislation sent directly to the floor of the Senate, bypassing committee opportunities for debate, with debate on the floor further blocked, thus rendering the legislation’s movement to a vote impossible.

In the House, we have a budget passed that actively cuts spending and offers reform for Social Security and Medicare so those programs can survive.  We have 17 separate jobs-related bills passed.  We have 5 bills related to American energy independence passed.  We see active support for fiscal moves that contribute both to reducing the nation’s debt and eliminating the annual budget deficit (a necessary prerequisite to lowering the debt).  We have a procedure that requires committee debate followed by floor debate.

The budget, the jobs bills, and the energy bills sit idle in the Senate, as the world’s greatest deliberative body refuses to consider them in any way.

Do-nothing Congress, indeed, but is it Congress as a whole, or one house of Congress that is bent on doing nothing?

Hmm….

Keynesian Spending vs. Personal Spending

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In this post, I want to talk about two fundamentally different views of spending in an American economy.

One view of spending is Keynesian: any spending is stimulative, and so government’s (stimulative) spending helps a stagnant economy break out of its stagnation.  Further, only government has the resources to provide the size of spending stimulus needed to break a downward cycle.

Thus, if we have a Keynesian stimulus of, say, the $800 billion of an Obama Stimulus bill, or the similar-sized aggregated stimulus spending of a New Deal 80 years, or so, ago, we would expect to see a stagnating, if not sharply contracting, economy break out of its doldrums and return to solid growth.  Yet we did not, in either case.

I won’t get into things like the fact that current government stimulus spending represents future taxes, or government stimulus spending represents a wealth transfer from productive sources to unproductive targets (in the laudable, but unsatisfied, hope that the recipients will become productive), or that government stimulus spending is aimed at a temporary response, while the costs of that spending—those taxes, and debt incurred—are long-term.  The reason government stimulus spending isn’t all that stimulative is that a tax dollar collected from an individual isn’t completely spent in the first place.  Some of that dollar is retained by the government for its own purposes, and some of that dollar is simply lost to intra-government friction.  Less than a dollar makes it out the door as actual spending.

The other view of spending is that personal spending is stimulative, and that were individuals in their aggregate to spend (or resume spending), a stagnating economy would break out of that stagnation.  Associated with this view is the commonly held belief that individual saving, by not being spending, does not contribute to breaking out of that stagnation.

When an individual spends a dollar, though, that whole dollar makes it out the door.  Of course, when the individual also saves that whole dollar is saved.  None of an individual’s dollar, while it’s in his hands, is lost to intra-individual purposes or to friction.

What happens to that individual’s dollar when he spends it, or to the government’s six bits that finally get into the economy as spending?  From here, they follow pretty much the same path: an initial food purchase is made at the local grocery store, some is spent on rent or mortgage, some is spent on the car, and so on.  Each of those recipients then spend some of their parts of that original dollar: on wages, on rent, on supplies, and so on.  All along the way, each individual or business recipient also siphons off a small amount as savings.  Each of those recipients, including the wage earners, repeat this general cycle until finally that original dollar has been consumed.  In general, the original dollar that an individual spends, in all of its spending incarnations through all those recipients’ subsequent spending, turns out to be worth around $1.75 to the local economy.  That government’s six bits, following the same path, though, can only amount to a little over $1.30 for the local economy at that same turnover rate.

Consider the money that’s saved instead of spent, now.  How non-stimulative is that money, really?  In the immediate term of a dollar actually spent, it’s not stimulative.  But it is stimulative in the not too distant future: that dollar saved either is held under the individual’s mattress against a future spending need, or more likely, it’s deposited in a bank or other financial institution.  Once that dollar makes it into the bank, it becomes part of a collection of lots of individuals’ dollars, and that collection is loaned to a number of individuals and businesses—for spending.  Saved money, thus, represents not too very delayed stimulus spending by others who have borrowed the money for the purpose.

But in the end, who is really doing the spending?  Either way, whether government or individual spending, it’s the individual individual’s money that is spent, and so it’s the individual who’s doing the spending.  A critical difference is in the pathway described above that is followed by the individual’s dollar, and this difference determines how much of that dollar actually gets spent and so the final value of that spending.

A dollar taken from an individual in taxes is therefore an expensive dollar.  It represents a loss of a dollar of private saving for future spending or for future private lending for spending, or it represents a loss of $1.75 to the taxed individual’s local economy that would have resulted from his spending that dollar himself.  If that tax dollar—or the roughly three quarters of it suggested above—comes back to that same local economy, it’s only worth $1.30, a reduction in value of 45¢.

Since government spending can only come at the expense of taxing the individual, it cannot be as stimulative as the aggregation of individual spending, even when some of that individual spending is delayed through saving mechanisms, and even if that government spending comes during an economic contraction.

What is the President’s Jobs Agenda?

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What, exactly, is the President’s jobs agenda, now that he’s begun campaigning on one, a year ahead of the next election and three years into his administration—three years in which unemployment has been as high as 10% and has stagnated at 9% for the last two years?  Three years in which he has pushed through his Obamacare health care legislation and his Dodd-Frank Wall Street legislation.  Three years in which he has shaken his finger very firmly at America’s enemies as he has presided over our retreat from the world stage.

Let’s review the bidding.  His opening move, at the end of summer, was a $440 billion bill in which he collected parts of Stimulus I, with its spending imperative, added a push for higher taxes for his class warfare reelection campaign theme, and titled the collection “The American Jobs Act.”  What were the jobs?  There weren’t any, directly.  Much of that spending, though, was aimed at transfers of national taxpayer monies to state and local public service unions—teachers, police, and fire fighter unions—to retain their support in Obama’s campaign.

When that failed, his next move was to pull his jobs bill’s spend and tax legislation apart and push the spending piece parts—always paid for with higher taxes, rather than spending cuts elsewhere—separately.  He did this against the backdrop of his campaign for reelection.

In parallel with that, he’s been having his EPA write “clean” air rules that are Draconian in their effect on, for instance, coal-fired electricity generating power plants.  As Josiah Neely, an Analyst with the Texas Public Policy Foundation, points out, these rules threaten existing and future jobs in return for highly doubtful favorable effects on air quality.  The Electric Reliability Council of Texas, reports Neely, says that enforcing the Cross-State and related rules could result in power plant closures to the extent that 183,000 jobs could be lost every year until 2020.  Our president is unconcerned about this, however.  In 2008, Candidate Obama bragged that under his proposals “if somebody wants to build a coal plant, they can—it’s just that it will bankrupt them.”

Just last week, Obama has decided to punt on the Keystone XL pipeline, a project proposed—in 2008—to build a pipeline to carry oil from Canadian tar sands to refineries in Texas and along the Gulf coast.  He said that, after these three years of review, he wants yet more, “to ensure that all questions are properly addressed and all the potential impacts are properly understood.”  This delay will cost 20,000 construction jobs and potentially 100,000+ downstream, more permanent jobs in the US.

Finally, we have this announcement from the Stryker Corporation, a firm that makes implants and instruments for orthopedics and neurosurgery.  Stryker is reacting to Obamacare taxes that are soon to take effect, and their press release, presented 10 November, says in part [emphasis added]:

Stryker Corporation announced its intention to implement focused workforce reductions of approximately 5% of its global workforce and other restructuring activities….  The targeted reductions and other restructuring activities are being initiated to provide efficiencies and realign resources in advance of the new Medical Device Excise Tax scheduled to begin in 2013….

Obama’s Medical Excise Tax is an Obamacare tax that applies to revenues, as opposed to profits, and it is driving companies that want to do development work in this area to reduce effort in this area and to reduce associated employment.  Other companies will likely outsource jobs to overseas jurisdictions that don’t have such counterproductive employment policies.  (As an aside, it needs to be noted that Stryker’s implants now will be harder, and more expensive, for our wounded veterans to obtain.)

Finally, Obama’s do-nothing Democrat Senate is sitting on 15 jobs bills that would have a real impact on our unemployment and our unemployment rate.

What is Obama’s jobs agenda, then?  He doesn’t have one.  He’s still working on his tax and spend agenda, and pushing class warfare to get more of it imposed.